In this workout, we are told that we buy a euro dollar 1.15 call option in 15 million euro notional. On expiry the option is to be cash settled.

We need to calculate the cash settlement amount in both euro and US dollars for the following spot rates on expiry. So we're given the strike of 1.15. Now, as this is a euro dollar call option, that means that we have the right to buy euro at a price of $1.15. Our euro notional is 15 million.

Down here we have various potential spot rates on expiry, and we then need to calculate the cash settlement amount in both US dollars and euro.

So let's start with the US dollar calculation because that is the currency in which the payoff will naturally occur. In this scenario, US dollars is the quoted currency, and that is the currency in which the payoff will be calculated.

So to calculate the payoff, we need to compare the spot rate with the strike rate and calculate the gain on expiry. Now, this is because we are doing cash settlement, unlike physical settlement, where with physical settlement, there will be a spot trade at the strike on expiry here with cash settlement, there is no spot trade on expiry. All that happens is a calculation of the payoff, and that amount is then settled in cash. So to calculate the payoff, we're going to compare the spot rate on expiry with the strike rate, and I'm going to lock that because we wanna copy our formula down and we don't want the strike to move because the strike stays at 1.15 regardless of what the spot on expiry is. And then we need to gross that up by multiplying by the notional amount. And again, I'm going to lock onto that so we can copy down correctly. Now you'll see we've got a negative $750,000, which means a loss of $750,000. And we know that that means the option is actually out the money and the option will not be exercised. So we do not want to come up with negatives in the scenario. We want to now wrap our formula in a max function to make sure that we only show positive payoffs because that's the nature of options. So I'm just gonna go back into my formula and I'm going to edit it to include a max function. So give me the maximum of 0 and the calculation that I've already got there, and if we now press enter, we can see that that loss has disappeared and we have a 0.

If we copy this formula down, we can see that up until we get to 1.20, there is no payoff on this option because the option is out of the money as it's a call option. Whenever the spot rate is less than the strike rate, we would not exercise the option because it's more beneficial to just go into the market and buy euros at a price of 1.10 as opposed to a price of 1.15. So in those cases, we would not be exercising the option, and instead we would just let the option lapse. When we move down our various spot rates on expiry, we can see we start then getting bigger and bigger payoffs as the option becomes more and more in the money. So that's the payoff in US dollars. And what we now want is the payoff in euros. And it's a very simple calculation to do this because all we have to do is take these US dollar amounts and convert it to euro at the spot rate on expiry. So I'm just going to increase the width of my column so my formula is visible.

And let's calculate our payoff in euro. So we take the US dollar payoff or cash settlement amount, and we divide that by the spot rate on expiry. And if we copy this down, we get the cash settlement amount in euros at the various spot rates on expiry.